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In
the period before the nationalization of banks, key
sectors of the economy, including agriculture, remained
thoroughly neglected in terms of availability of institutional
credit. Whereas the industrial sector at that time accounted
for about 15% of national output and it appropriated
two-thirds of commercial bank credit. Whereas the agricultural
sector contributing about half of national output was
almost completely neglected by the commercial banks.
One
of the most important objectives of government policy
since the nationalization of 14 commercial banks in
1969 was to extend and expand credit not only to those
sectors which were of crucial importance in terms of
their contribution to national income and employment,
but also to those sectors which had been severely neglected
in terms of access to institutional credit. The sectors
that were initially identified for this purpose were
agriculture, small industry and self-employment. These
sectors were to be accorded priority status in credit
allocation by the banks. As a consequence, policies
such as interest rate controls and preemption of resources
through directed credit programs aimed at agriculture
and the small-scale sector increased in magnitude during
this period. There was also a concerted effort at substantially
expanding the reach of the banking system, especially
to the rural areas.
The
success of policy in terms of branch expansion, mobilization
of household savings, diversification of lending targets
and direction of credit to the priority sector was substantial.
Yet, by the late 1980s, the banking sector in India
was faced with criticism of a completely different kind.
The focus of that criticism was the low profitability,
low capital base, high non-performing assets and the
ostensible "inefficiency" of and lack of transparency
in the banking system. Such criticism constituted the
committee on the financial system in 1991 to pave the
way for the liberalization of banking practices. Under
this background the article considers the main elements
of banking reform over the past few years and the implications
for agricultural credit in particular. |
